14/02/06 FTSE 100 Index (Code: UKX)

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Footsie makes another new high this morning as we move back above 5,800 points. We haven't been at these levels since June 2001. Indeed if you look back at these levels (drag the slider on the bottom of your chart) in 2001 you see just how much resistance there was at 6,000 points. Will that be our test this summer?

I am often asked why I don't use Moving Averages very much. It is true that I don't and it is mainly for two reasons. The first is that they are quite a slow tool for a signal. The average takes time to react to the price changing. You can address this by using Exponential averages or better still INDEXIA Moving Averages.  These place more emphasis on the latest prices. The second reason is you always have to choose a period for the average and different periods work best for different instruments and time horizons. Again you can improve this process by using the Optimiser which will tell you which averages worked best, for instance which averages produce the best signals for the most profit. You will find if you pitch a trailing optimised stoploss against an optimised moving average, that the trailing stop wins over 80% of the time.

For Footsie, the 200, 90 and 21 day moving averages all work quite well. The 200 and 60 periods are quite widely used giving long and medium term views. For instance looking at the 200 day line (red) we see the buy signal that was given in April 2003. This line was crossed in the summer of 2004, something that didn't happen on the optimised 6% Stoploss in fact. A fund manager seeing this in 2004 may have down-weighted and waited for a cross back above the 200 day average. We have been above this line ever since which many would see as defining the existence of a long term uptrend. The 90 day average is another on that many analysts use. Here we see the two dips of 2005 crossed this (blue) pointing to the 'risk points' in the market last year.

The debate over which averages to use starts to get more marked for the shorter term some use 20,40 or 60 period averages. Personally I like the 21 day. It's closer to a month in terms of number of trading days and it is a Fibonacci number. Here we see (green line) how the Footsie hugs this line from above for short periods. You have to allow for the odd breach of a day or two, like a signal delay for Stoploss, but the 21 day average does help you spot the shorter term trend.

Finally, a mention on crosses of averages. The price crossing the average is one aspect of reading moving averages, but the best signals are when a combination of averages have crossed. While the sell signals are late, the buy signals have been quite effective on Footsie. This is where the 21 day (green) crossed up through the 60 day (blue) average. This happened in Aug 2004, Jul and Nov 2005.

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